We expect the May CPI data to show that CPIF inflation rose to 2.1 percent on the back of surging energy prices (see tables and charts below). Last month, electricity prices actually cooled somewhat, but this was more than offset by increasing fuel prices. Turning to CPIF excluding energy, we expect the annual increase to have accelerated slightly, reaching 1.5 percent. We expect CPIF to surprise on the upside vs. the Riksbank forecast, while CPIF excluding energy is in line with the Riksbank's Monetary Policy Report. We expect the Riksbank to raise both forecasts going forward.

The energy price rise is no longer a temporary nuisance for the Riksbank

Energy prices have been lifting inflation for two years now. That means the rise can hardly be seen as a volatility-generated change in relative prices that the central bank should "look through" in its policy decisions. Instead of being a nuisance that has to be disregarded, energy prices are now driving inflation, with second-round effects pushing up other prices as cost pressure has risen. And higher energy prices are here to stay for quite some time, as prices in the futures market are also up. In Sweden, for example, record warmth in May brought dry weather, worsening the outlook for hydropower and thereby pushing up futures prices in the North European market. The bottom line is that we now see CPIF inflation ending up at an annual average of 2 percent for a second consecutive year, albeit with considerable volatility between now and New Year's Eve.

Lately, global inflation and wage data, along with sentiment indicators and exchange rate movements, have been mostly supportive of a continued upward trend in underlying inflation. We choose to view this as data confirming our long-standing positive forecast, rather than a reason to revise up further. Remember that we have previously argued for a forecast above forecast model predictions. Now, influenced by the incoming data, forecast models for CPIF excluding energy end up in line with our official forecast.

CPIF inflation expected to have risen above 2 percent in May, as energy prices are surging

Monthly energy price increased not so fast during May, but in stark contrast to the same period last year

Our short-term forecasts are higher than those of the Riksbank

For the past two years energy prices have contributed significantly to inflation

Global oil and North European electricity spot and futures prices trending upward, meaning consumers will face higher energy prices for quite some time